Buying Your First Investment Property: Get Answers With Carrie

CEO Khai Intela
Buying your first investment property is a big decision! It's a step towards financial freedom and long-term income. But before you dive into the world of real estate investments, there are a few things you...

Carrie Borgstrom sitting with a business client

Buying your first investment property is a big decision! It's a step towards financial freedom and long-term income. But before you dive into the world of real estate investments, there are a few things you should know. Luckily, Business Banking Officer Carrie Borgstrom is here to offer valuable insights and reminders for first-time property investors.

Business Property Loans Are Different From Your Mortgage

If you're thinking about purchasing a residential property for the purpose of renting it out, you need to understand that business property loans are different from most home mortgage loans. Carrie emphasizes the importance of this difference, saying, "One of the first discussions I have with people looking to use a business loan to purchase a residential property is that there isn't a 30-year fixed-rate loan option. Instead, there's a lot more flexibility with how to structure things!"

Understanding Business Property Loan Fixed & Float Terms

Unlike the standard fixed-rate loan you may be familiar with from purchasing your own home, business property loans usually have a period of time where the interest rate is fixed followed by a period where the rate can change. For example, your investment property loan could have a fixed interest rate for five years and then a rate that can change or "float" for ten years. This float period means that your loan interest rate can go up or down based on an index rate that changes with market conditions. Royal offers several combinations of lock and float term options, providing borrowers with flexibility. Additionally, borrowers have the option to re-lock the rate during the float period if they prefer.

One popular choice includes a ten-year lock term followed by a ten-year float term. "The big benefit to these loans is getting a fixed rate for up to ten years," says Carrie. "Especially for first-time property buyers, having a consistent rate and payment locked in means they can focus on managing their property and business finances before worrying about changing rates."

Royal Offers Fully Amortizing Business Loans

One notable advantage of Royal compared to other financial institutions is that they offer fully amortizing business loans. That means the principal and interest repayment happens throughout the loan term, and loan maturity occurs when the loan is paid in full. Many other institutions only offer business loans as balloon loans, where the remaining loan amount is due in full at the end of the loan term. This often leads borrowers to refinance the balloon payment into a new loan, resulting in additional costs and uncertain rates.

In contrast, most Royal business borrowers can re-lock their loan rate during the float term with just a credit check and a small fee instead of a full appraisal and closing costs. Having a fully amortizing loan provides borrowers with peace of mind, eliminating the uncertainty that comes with balloon payments.

Qualifying For A Business Investment Property Loan

Qualifying for a business investment property loan requires considerations similar to traditional home loans. Lenders check personal credit scores for business owners, and a healthy credit score plays a big role in loan approval. For an investment property, the income from the property, including a percentage of the fair market rental income and a buffer for potential vacancies, is considered in the debt service coverage ratio. Details about any other business debts must also be provided.

Unlike home loans for primary residences, down payment assistance options are not typically available for business property purchases. Most borrowers will need to bring at least a 20% down payment to be approved. Additionally, borrowers may be required to keep a certain amount of cash reserves available to qualify for a loan. Keeping three to six months of loan payments as cash in a deposit account is recommended, depending on your financial situation.

"Remember that a business property has a different set of risk factors compared to a personal mortgage loan," advises Carrie. "If you encounter a financial challenge, you're going to keep your personal residence paid first and worry about your rental property second." By following Royal's requirements, borrowers and the credit union can minimize risk.

Don't Forget About Ongoing Property Needs

Planning for the ongoing financial needs of a business investment property is crucial. Carrie suggests creating what-if scenarios to understand monthly cash flow and ensuring that borrowers are positioned to succeed before moving forward with a loan. It's also important to plan to save 15% of gross rents each month to cover cash reserves, maintenance costs, and repairs.

Property-related expenses, such as real estate taxes and insurance costs, need to be taken into account. Royal doesn't escrow funds for business loans, so borrowers will need to save for these expenses on their own.

Lastly, being a landlord comes with new responsibilities and skills to learn. From advertising the property, attracting tenants, and setting rent structures to handling property maintenance and making important decisions, there's a lot to consider. Carrie reminds potential landlords that being a landlord is more than just collecting rent each month. It's essential to discuss the financial side of things and ensure that the investment will be worthwhile.

Royal Credit Union Is Your Trusted Advisor

Royal welcomes business loans of all sizes. Carrie and the team at Royal are committed to taking the time to explain everything to first-time borrowers and ensuring their understanding throughout the loan process. Whether you're looking for an investment property loan or other business credit options, Royal has you covered.

"Members can feel confident that Royal wants to see their business succeed. We build long-term relationships with the people we help, so their goals become our goals," says Carrie.

If you have questions or want to discuss buying an investment property, don't hesitate to reach out to Carrie directly or find a Royal Business Banking expert near you.